Chief securities cop Galvin sets up new unit to monitor newfangled funding methods.
Massachusetts' top securities regulator today launched a special unit to monitor crowdfunding websites and to keep track of private-placement advertising, two new fundraising methods authorized by a federal law passed more than a year ago.
Secretary of the Commonwealth William Galvin said the group, housed within the Massachusetts Securities Division, will assess the impact of new rules that allow private-equity and hedge funds, as well as issuers of unregistered securities, to advertise to the general public online, through social media, and on television, radio and in print.
The Securities and Exchange Commission adopted a rule earlier this month to lift its 80-year-old ban on general solicitation of private placements. The rule is scheduled to go into effect Sept. 23.
The rule implements a provision of the Jumpstart Our Business Startups Act, which was approved by Congress more than a year ago and designed to ease securities registration for small firms. The SEC has not yet proposed rules for the crowdfunding section of the measure, which will allow companies to raise equity in small amounts from individual investors.
Proponents argue that the law will help entrepreneurs launch enterprises and grow, but critics, including state securities regulators, contend that the advertising rule lacks sufficient investor protections.
“The JOBS Act may accomplish its intended purpose of allowing small businesses to raise capital and create jobs — and I hope it does — but it also sets in motion a much easier path for shady operators and outright crooks,” Mr. Galvin said in a statement.
Under the SEC rule, private securities can be purchased only by qualified investors who meet net worth and income standards. In crowdfunding, securities can be sold in small increments to nonaccredited investors up to an annual limit of $2,000 or 5% to 10% of income. Such offerings can be highly speculative and risky.
“I do not begin to think that one state can monitor and police the Internet, but I am going to take every proactive step I can to protect investors in the Commonwealth from those who would abuse the provisions of the JOBS Act,” Mr. Galvin said.
The unit will gather data on offerings, monitor portals, check how investors are verified, ferret out fraudulent offers and refer cases for enforcement action.
Market participants endorsed Mr. Galvin's move.
“Both from a monitoring standpoint, as well as a feedback standpoint, it could be beneficial to the industry as a whole,” said Richard Rodman, chief executive of Crowdentials Inc., a regulatory compliance software company.
David Drake, founder and chairman of The Soho Loft, a crowdfunding education and financial media firm, said he doesn't anticipate much fraud once the crowdfunding market takes off. Still, he supports have having more regulatory eyes focused on the area.
“It's good for public confidence to know that someone is out there checking,” Mr. Drake said. “For the public, it's needed; for the industry, it's not. But it's always good to monitor as long as it doesn't increase the red tape and regulatory cost for issuers.”
